As the coronavirus pandemic continues to sweep every corner of the world, doing business has become more complicated. There are several legal instruments businesses can consider to potentially excuse themselves from performance under a contract, such as the ones listed below. Since their application often turns on questions of foreseeability, how is their use impacted by COVID-19 now that its capacity for disruption is clearly on our radar?
Force Majeure
Force majeure clauses are commonly included in commercial contracts, and allow a party to suspend performance, and/or avoid liability for non-performance, if certain listed circumstances beyond a party’s control prevent or severely hinder the performance of the contract. These supervening events generally include drastic interruptions to business operations, such as natural disasters, armed conflict, or governmental orders, that make performance infeasible.
Whether the COVID-19 pandemic or related disruption constitutes a force majeure event will depend on the drafting and interpretation of each contract – some force majeure clauses are worded broadly, others more specifically. This means that they must be analyzed case-by-case, with courts looking at the intent of the parties, the context, and the particular language used. In New York, for example, courts tend to interpret these clauses narrowly, requiring that the type of event invoked under the clause be specifically referenced. For this reason, precise language is important, and a skilled attorney will take some trouble to identify the events that should trigger the effects of force majeure.
If a force majeure clause uses broader wording and refers to, for example, “other events beyond the control of the parties”, then the supervening event must have been an extraordinary event which was unforeseeable at the time the contract was made.
Today, we are all aware of the risks of coronavirus, yet may still be unsure exactly how they will affect our contracts. In these conditions, anyone concerned that these foreseeable risks may hinder their performance should deal expressly with the impact of coronavirus in carefully-drafted contracts.
Other Doctrines
If your contract does not contain a force majeure clause, you may look to common law concepts such as the following:
Frustration: Frustration is a common law doctrine that may be invoked where contractual performance has been obstructed (or rendered radically different, under English law) by an uncontrollable outside situation, such that the parties can no longer achieve the originally intended purpose of the contract. However, a contract is not frustrated where a valid contract term deals with the situation, or where the parties should have foreseen the frustrating event at the time they made the contract.
Impossibility: Impossibility excuses a party from performance under a contract only if that performance has become objectively impossible (not merely more onerous), as a result of a supervening event beyond the control of the parties. In particular, the impossibility must result from an unanticipated event that a party could not have foreseen at the time the contract was made.
In some jurisdictions it may be possible to make use of the legal concept of impracticability: for example, Section 2-615 of the New York’s Uniform Commercial Code (applicable to transactions in goods) recognizes impracticability due to unforeseen circumstances. Courts will, again, look to whether the supervening event was within the contemplation of the parties at the time of contracting.
As with force majeure clauses, a detailed assessment of the circumstances is necessary under each of these doctrines to see whether a party can be excused from performance.
How You Can Manage Your Contracts in the Wake of COVID-19
One piece of advice that has always been applicable to business agreements, but is abundantly relevant now, is to write thorough contracts – an ounce of prevention is worth a pound of cure.
We recommend that you review all aspects of your existing contracts, especially if performance has become difficult or impossible due to COVID-19. Look for provisions that may be affected by the ongoing pandemic – in particular any provisions which require notification to the other party of complications, delays or non-performance – and take documented steps to ensure you are complying with all provisions as best as you are able. You might also consider purchasing insurance that provides compensation if one party or another doesn’t perform under a contract, reviewing the particular policy wording carefully.
Even if the COVID-19 pandemic is not expressly covered by a force majeure clause in a given contract, it may be possible for a party to utilize one of the legal instruments outlined above, if this was arguably an unforeseeable event at the time the contract was made; going forward, however, we advise addressing COVID-related risks with specificity in your agreements.
In Conclusion
Many entrepreneurs and managers will find it difficult, if not impossible, to satisfy all terms of their business contracts going forward. It remains possible and in many cases may be advisable for parties to vary their contracts or renegotiate terms (as we all know, in litigation, the only party certain to win is your attorney!). We would be happy to discuss these matters with you, negotiate a non-litigious outcome, and chart out a path forward.